Global economyTen years after the financial crisis

WHEN asked how he went bankrupt, one of Ernest Hemingway’s characters replies: “Two ways. Gradually and then suddenly.” That’s rather how the crash was for the world. There was an extended build-up, with cracks in the system emerging during the course of 2007. Then there was the sudden shock, when Lehman Brothers collapsed in September 2008 and the global banking system teetered on the edge. The tenth anniversary of that frightening moment approaches.

There were some impressive takes from authors in the immediate aftermath of the turmoil, such as Andrew Ross Sorkin’s “Too Big to Fail” and Michael Lewis’s “The Big Short”, which was made into an Oscar-winning film. “Inside Job”, a documentary, was a scathing attack on the culpability of the finance industry for the crisis. And a new adaptation of a three-part play about the history of Lehman has just opened at the National Theatre in London.

Adam Tooze, a historian noted for his works on the interwar period, is aiming to be less entertaining than authoritative: he takes on the financial and economic history of the last decade in a monumental tome of nearly 700 pages. Yet with the events it covers so recent and so dramatic, the book is as much reportage as historical analysis.

Four big themes emerge from Mr Tooze’s account of the post-2008 era. The first was the immediate post-crisis response, in which the banks were rescued and both the monetary and fiscal taps were loosened. The second was the euro-zone crisis, which hit Greece and Ireland hardest, but also affected Portugal, Italy and Spain. The third was the shift in the developed world after 2010 to a more austere fiscal policy. The fourth was the rise of populist politics in Europe and America.

Mr Tooze sides with most economists in taking the view that the immediate post-crisis response was necessary, but unfortunate in that executives in the banking industry paid too low a price for their folly; that Europe was slow and narrow-minded in dealing with the peripheral countries; and that the switch to austerity was a mistake. Taken together, the backlash against bankers, frustration with EU governments and the impact of austerity led to the rise of populism, the election of Donald Trump and the Brexit vote.

A big part of the problem, as the author points out, was a failure of political leadership. European politicians initially dismissed the crisis as an American problem, generated on Wall Street, even though Europe’s banks also had balance sheets stuffed with dodgy loans. Meanwhile in America, the Bush administration got its crisis measures through Congress only with support from Democrats, but bipartisanship stopped the moment Barack Obama took office.

Perhaps the most dangerous failure, though, lies in the unwillingness to deal with problems which lie at the heart of the system and persist today. The finance sector, which caused the crisis, looks remarkably unaltered. Banks may now hold more capital and their bonuses are now tied to longer-term performance. But bonuses are still very high; the average payout on Wall Street last year was $184,220, just shy of the 2006 record. Scandals over banks’ bad behaviour, in areas such as price-fixing, money laundering and mis-selling continue to come to light.

Anyone who fell asleep in 2006 and woke up to look at the financial markets today would have no idea there had ever been a crisis. Share prices in America have repeatedly hit new highs and valuations have been surpassed only in the bubble eras of 1929 and 2000. The interest rates paid by governments and corporations to borrow money are very low by historical standards. In global terms, the amount of debt relative to GDP is about as high as it was before the crisis. As the author points out, it is far from clear that governments will be willing to take decisive action when the next crisis hits.

The debate about macroeconomic policy goes on in much the same way as it always has. Those who believe that governments can afford to borrow and spend more are still arguing with those who think that debt is already too high. Those who want central-bank policies to return to normal (higher rates, no more purchases of government bonds) are still arguing with those who believe that premature monetary tightening will damage a still-fragile economy.

The big change has been in the public mood. The idea that markets, left to their own devices, will efficiently and fairly allocate resources had gained adherents in the 1990s and early 2000s. Centre-left governments, such as Tony Blair’s, were happy to leave the financial markets to get on with it. Now those middle-ground politicians are out of office, as voters peel off towards the far-left and nationalist right.

Even the Republican Party in America has swallowed its free-market instincts and is tolerating President Trump’s protectionist measures and threatening behaviour towards firms he takes against. Many British Conservatives have been overtly hostile towards those business leaders who express fears about Brexit. The idea that trade makes everyone better off in the long run is no longer universal; indeed Mr Trump sees it as a zero-sum game. These views are showing up in the numbers: global trade has stopped growing much faster than GDP, as it did before the crisis.

This change of mood raises fears about what will happen when another storm hits the world economy. The level of co-operation that occurred in 2008 and 2009, such as when America’s central bank made dollars available to its cash-strapped European counterparts, may not be easy to achieve next time around.

Tomorrow’s chroniclers will be grateful for Mr Tooze’s assiduous research. He leaves no mortgage-backed security uncovered, no collateralised debt obligation unexamined in his effort to produce the most comprehensive account of this complex and gripping subject. The general reader might find it a bit of a slog. It is not that the author cannot see the wood for the trees, more that the forest is so large and dark that it is easy to get lost. Sometimes the broader themes simply get overshadowed by an account of another round of cliffhanger meetings.

Mr Tooze ends by comparing events today with those in 1914, when the world sleepwalked into conflict. But arguably it is the interwar period that is the most pertinent parallel. The armistice ended the first war but the tensions that generated the first conflict simmered and finally exploded once more.

For policymakers, another deadly metaphor is perhaps more appropriate. Central banks brought a global economic heart attack to an end by performing emergency surgery. But the patient has gone back to his old habits of smoking, heavy drinking and gorging on fatty foods. He may be looking healthy now. But the next attack could be even more severe and the medical techniques that worked a decade ago may not be successful a second time.

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